Trustees’ role in exiting the greylist - 12 September 2024

Trustees’ role in exiting the greylist

South Africa was greylisted in 2023 by the global financial crime watchdog, the Financial Action Task Force (FATF), created under the Group of 7 countries (G7) to combat international money laundering and, after 2001, terrorist financing, for not complying with international standards. This increased reputational risk, limited inward foreign investment, and made it more difficult for South Africans to access foreign capital as foreign businesses and banks require more due diligence. According to Krutham (formerly Intellidex) this could optimistically cost our economy 1% of Gross Domestic Product (GDP) a year or pessimistically even 2% to 3% – a cost we can hardly afford. The goal is to have all 22 action items agreed to with the FATF addressed by January 2025 so that we can be removed from the greylist after a final visit by the FATF in April/May 2025. If South Africa is not removed from the greylist by June 2025, we will have to report to the FATF every four months until all deficiencies have been addressed. The FATF measures are, therefore, not going to go away, and it is in all South Africans’ interests to participate in government’s efforts to meet the requirements by January 2025.

Of the 22 action items linked to the eight strategic deficiencies, only eight items have been addressed, with 14 remaining. We must demonstrate that the improvements made are sustained over successive reporting periods. Feedback from the government at SAIT’s recent tax indaba was that good progress was made, but much work remains. At the FISA conference this week, the Master provided an update and shared statistics confirming that, as of 23 August 2024, of the one million-odd registered trusts, only 61 145 trusts have filed beneficial ownership information. That means only 6% of trustees meet this legal requirement.

Recently, during a webinar, SARS indicated that only 380 000 (about 38%) trusts are registered with SARS as taxpayers, which is also a legal requirement. Of them, only a small percentage submit tax returns. SARS plans to introduce punitive penalties for non-submission of trust tax returns by December 2024. The Master also indicated that SARS, the Financial Intelligence Centre (FIC), and law enforcement agencies now have access to the Master’s beneficial ownership register, and that 69 officials from various law enforcement agencies already have access to that.

The Master plans to launch a multi-pronged media campaign to urge trustees to comply voluntarily. They will also remind trustees of penalties that will be imposed for those trustees who do not comply. With SARS regarding itself as a “secondary collector” of beneficial ownership information, the deadline of November 2024 to bring all trusts up to date with taxes without penalties, and the fact that SARS is one of the entities with access to the Master’s beneficial owner register, SARS will soon have more complete information than the Master. They may very well compare notes.

Trustees are also required in terms of the FATF measures to record their interactions with “accountable institutions”. Few trustees know these are additional requirements to the beneficial ownership requirements. The new measures require trustees to become ‘FIC experts’, as they need to know the elaborate list of new “accountable institutions” in terms of Schedule 1 of the Financial Intelligence Centre Act. They need to inform an “accountable institution” they deal with that they are acting in their capacities as trustees (therefore paperwork is required to prove that). The trustees are also required to maintain a register of “accountable institutions” they deal with. The Regulations also require trustees to understand and record details of “accountable institutions”, such as whether the trustees are using the “accountable institution” as an agent and whether their relationship can be classified as a “single transaction” or a “business relationship”. Clearly, layperson trustees do not have the required knowledge and require the help of a professional who can assist them. Ultimately, the board of trustees remains liable for non-compliance, so they must obtain proper professional assistance to meet these new requirements.

These two measures each carry a R 10 million fine and/or 5 years’ imprisonment for non-compliance. The FIC recently indicated that the estate agents, attorneys and trust and company service providers are the culprit “accountable institutions” who do not comply with their obligations. The FATF has given the FIC a May 2024 deadline to demonstrate improved supervision of so-called Designated Non-Financial Businesses and Professions (DNFBPs) such as real estate agents, legal practitioners and dealers in precious metals and stones. The rate of compliance expected by the FATF is 100% or “close to 100%”.

On 23 July 2024, the FIC issued a media release. It stated that they are aware of DNFBPs who keep ignoring the FIC’s directives, which will assist in getting South Africa off the greylist. The FIC requires accountable institutions to submit risk and compliance returns (RCRs) to assess the level of risk for money laundering and terrorist financing. Unfortunately, only about 63% of DNFBPs (legal practitioners, estate agents, trust and company service providers and casinos) submitted their returns. These institutions now face targeted inspections or targeted sanctions for their non-compliance. Administrative sanctions may be imposed on these businesses. The FIC has already issued fines to nine accountable institutions between R 20 000 and R 7.7 million.

Trustees should be mindful of the FIC’s auditing of “accountable institutions” as it is easy for them to check whether trustees have met their obligations, supported by paperwork as referred to above.

Trustees should not assume that their service providers will ensure they remain compliant. Trustees remain ultimately responsible for compliance and may face sanctions for non-compliance.